posted by Amber on .
The federal budget passed by Congress
and signed by the president shows the relationship between budgeted
expenditures and projected revenues. Why does the budget require a forecast
of the economy? Under what circumstances would actual government
spending and tax revenue fail to match the budget as approved?
Take a shot, what do you think?
Hint: just use common sense to answer this one.
A budget forecast directly indicates that government is going to increase its budget deficit or going to cover it. This forecast also provides the likely impact on other maco-economic indicators as inflation, nominal interest rate etc. If government clearly mention in the forecast that it is going to meet out all its expenditure by collection revenues. And the collection of revenues is not going to impact the market at all. In this situation price level go down.
The main cause of the deficit budget is fiscal policies. But due to war and severe recession budget deficit increase. Governments’ large Investment in public sector for constructing highway, providing electricity etc creates budget deficit. The Crowding out effect is also responsible for increased budget deficit. When a government borrows funds to cover a deficit, the interest rate increases and households and firms are “crowded out” of the market for loanable funds. The resulting decrease in C and I dampens the effect of expansionary fiscal policy.